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Chesapeake offers to settle Pennsylvania royalty cases

Chesapeake Energy is offering to settle several federal cases involving the alleged overcharging of post-production costs from Pennsylvania royalty owners contingent upon the state attorney general agreeing to a settlement in a similar case it had brought against the producer in state court.

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Attorneys for Chesapeake proposed the about $30 million settlement last week in a status hearing in the US District Court for the Middle District of Pennsylvania before US District Judge Malachy Mannion.

The proposed global settlement would resolve all the claims that have been pending against the producer for about four years, relating to Marcellus Shale leases concentrated in northeastern Pennsylvania that the producers secured near the beginning on the Marcellus gas land rush.

"Nothing's going to happen until the Pennsylvania attorney general participates in combined settlement negotiations," Michael Donovan, an attorney representing royalty owners in one of two pending federal class action cases, said in an interview on Wednesday.

"The point of the status was to alert the Pennsylvania attorney general to the pendency of the negotiations and to invite them to participate because they have a similar cases pending before Chesapeake related to antitrust claims," Donovan said.

The litigation in federal court arose when royalty owners sued Chesapeake, claiming the producer had improperly deducted post-production expenses from their royalty payments.

Those suits have been consolidated into two federal class action suits, one involving royal owners whose contract with Chesapeake contained market enhancement clauses and one for those royalty owners whose contracts did not contain such clauses.

In December 2015, former Pennsylvania Attorney General Kathleen Kane filed a lawsuit against Oklahoma City-based Chesapeake and fellow Marcellus producer Anadarko Petroleum in the Bradford County Court of Common Pleas, alleging deceptive trade practices.

Under the proposed settlement in the federal cases, royalty owners whose contracts contain market-enhancement clauses would get a cash settlement for past charges of about $22 million, while those royalty owners that do not have the market enhancement clauses in their leases would get a cash payment for past overcharges of about $7.5 million charges.

Going forward, lease owners would have the option of choosing whether to have their royalties calculated by the basin index price, with no deductions taken out, or to could continue having their royalties calculated by a netback method, where the gas is sold at market price, minus the cost of gathering and transporting the gas to market.

At the status conference, Mannion encouraged the state attorney general's office to get on board with the proposed settlement.

According to a transcript of the conference, he asked if there was anything else that the attorney general wanted to accomplish in the case, "so that we can try to figure out: is there a practical way to get to that without really hanging around for three more years?"

The state attorney general's office did not comment on the negotiations with Chesapeake, but in a statement, Attorney General Josh Shapiro pointed to recent rulings in the Bradford County court, allowing the state's case against the producer to proceed.

The Bradford County court held that Chesapeake and Anadarko and their leasing practices are subject to the Pennsylvania Unfair Trade Practices and Consumer Protection Law and the attorney general's lawsuit is in the public interest.

"Our case now moves forward," Shapiro said.

--Jim Magill,
--Edited by Annie Siebert,